Module 7: Current and Long-Term Liabilities

1. Current Liabilities

• Accrued Liabilities: Expenses incurred but not yet paid (e.g., wages payable, taxes payable).

• Short-Term Debt: Bank loans or commercial paper due within a year.

• Deferred Revenue: Cash received in advance, recognized as revenue when earned.

• Contingent Liabilities: Potential liabilities (e.g., lawsuits, warranties) recorded if probable and estimable.

2. Long-Term Debt

• Types:

  • Bonds: Issued in capital markets with periodic interest payments.

  • Notes Payable: Typically bank-issued, structured like bonds.

• Bond Pricing:

  • At Par: Market rate = coupon rate.

  • Discount: Market rate > coupon rate.

  • Premium: Market rate < coupon rate.

• Debt Repurchase: Gain/loss recognized based on difference between carrying value and repurchase price.

3. Quality of Debt

• Credit Ratings: Determined by agencies (S&P, Moody’s, Fitch), based on capital structure, cash flow, and risk.

• Risk Premiums: Higher credit risk = higher yield demanded by investors.

• Effective Cost of Debt: True cost of debt issuance, factoring in premiums/discounts and issuance costs.

4. Time Value of Money (Appendix 7A)

• Present Value (PV): Current value of future cash flows, calculated using discount rate.

• Future Value (FV): Value of current cash after growing at a set rate.

• Annuities: Equal payments at regular intervals; includes PV and FV calculations for annuities.

Exam Tips

• Understand Bond Pricing Mechanisms: Recognize par, discount, and premium scenarios.

• Know Key Ratios for Debt Analysis: Coverage ratios, DSO (Days Sales Outstanding), DPO (Days Payable Outstanding).

• Credit Analysis: Familiarize with factors influencing credit ratings and implications on debt cost.